Reston Inc.has expected sales of R17,000,000.While 10 percent of its customers pay cash, the remaining 90 percent pay on credit with 40 percent paying on Day 10, 30 percent paying on Day 20, 15 percent paying on Day 25, and 15 percent paying on Day 30.Assume that the cost of funds invested in receivables is 10 percent.Suppose that the firm's customers begin paying later, such that the new DSO increases to 24 days, that the firm uses a 360-day year, and that the firm's variable cost ratio is 80 percent.What is the additional interest cost to Reston of the additional investment in A/R caused by the delay in payment by its customers?

Question

Quizplus · Accepted Answer

The additional interest cost is the difference between the interest cost on the old and new DSOs. The old DSO is 17 days (10% * 10 days + 40% * 20 days + 30% * 25 days + 15% * 30 days), and the new DSO is 24 days. The additional interest cost is therefore:(10% * 360 days / 365 days) * (24 days - 17 days) * R17,000,000 * 0.80 = R19,550